WASHINGTON D.C. - China's 30-year economic miracle is based mostly on decentralized entrepreneurship and innovation, not state-led growth or unfair trade practices, contends Bret Swanson, a senior fellow at The Progress & Freedom Foundation and director of PFF's Center for Global Innovation. In a new Progress on Point research paper, "Entrepreneurship and Innovation in China: 1978-2008," Swanson shows how local incentives, diffuse decision-making, enterprise, and competition - not central planning or currency manipulation - fueled China's boom.

"China deserves a gold medal for economic policy," Swanson states. "Despite the well-known black marks of environmental pollution and intellectual property violations, China freed its people to create, produce, and trade with the world, and they have done so with amazingly positive results." Growing almost 10 percent per year for three decades, China is now the world's third largest economy with a projected 2008 GDP of more than $3.7 trillion.

"China's stunning rise is an epochal event that will continue to shape the world for decades to come," says Swanson. "But to date, we've only had a vague understanding of how China achieved three straight decades of 10-percent growth. To formulate smart economic and political strategies for the coming decades - both abroad and at home - the U.S. needs a clearer view of China's economic history."

In the paper, Swanson tells the stories of Deng Xiaoping and Jiang Zemin and their creative political strategy that navigated the tight-rope transition from backward totalitarianism to vibrant modern capitalism. He also details both the well-known and unorthodox economic policies and phenomena that started and sustained the boom:

• broad and deep tax cuts, free trade, and stable monetary policy;
• the unorthodox Special Economic Zones, which grew from four original experimental outposts to some 8,000 zones of freedom;
• and the completely unforeseen emergence of tens of millions of competitive and entrepreneurial Township & Village Enterprises, which often enjoyed marginal tax rates of zero.

Swanson also identifies numerous challenges remaining inside and outside China: the nation's political evolution, including prospects for democracy and free speech; the environment; the inland-coastal divide; opening the capital account and making the RMB currency convertible; further opening to foreign trade and investment; and a host of regional and global political and military matters.

"The chief policy lessons for the U.S. are to keep trading and engaging with China. That's the best way to positively affect their behavior. And to relentlessly pursue more competitive tax rates, less regulation, more immigration, and better education at home."

"This will be a Chinese century," Swanson concludes. "The biggest question for politicians and business leaders in the U.S. is whether, through a recommitment to entrepreneurial capitalism, it will be another American century as well."

The Progress & Freedom Foundation is a market-oriented think tank that studies the digital revolution and its implications for public policy. It is a 501(c)(3) research & educational organization.